The economic future is worse than you could ever have imagined. The green shoots are just a figment of your imagination. Sorry.
This article is the bear case in our Duelling Fools feature on "Is The Economy Recovering?" Read the intro, bull case and then cast your vote here.
Let me preface this duel by saying I consider myself an optimist. My glass is half full. There is no use crying over spilt milk.
I say this because what you will read below may shock you. It may cause you to sell up all your shares, stuff all your money under the mattress, and head down to Tesco (LSE: TSCO) and Sainsbury (LSE: SBRY) to stock up on bottled water and baked beans.
You don't need to do any of that. It's not that bad. We've had recessions before, and recovered. We'll recover from this recession too. It just won't happen quickly.
Welcome To The Great Recession
Across the globe, most economists, politicians and central bankers agree this is the worst recession since the Great Depression of the 1930s. It has been dubbed The Great Recession.
Without getting into too much detail or blame, the root cause of the Great Recession is plunging US house prices. Greedy bankers lent too much money to greedy consumers so they could buy their McMansions in the sun. The problem with debt is you have to pay interest on it and you have to pay it back. You should know what happened next…
There has been a lot of talk about the "green shoots of recovery". US Federal Reserve Chairman Ben Bernanke first mentioned them way back in March, saying "…I do think that we will get (the economy) stabilised, and we'll see the recession coming to an end probably this year."
Worst For 50 Years
"Probably" is the key word. We are more than six months into 2009. That doesn't leave much time for the recession to end this year, especially when you consider…
- FT 30 June 2009: "Official figures on Tuesday confirmed the UK had suffered its worst slump in output for 50 years…Even if the economy recovers in the second quarter to its normal 2.5 per cent annual growth rate, something economists think is highly unlikely, it is likely to take until 2011 before output returns to its pre-recession levels."
- FT 1 July 2009: "Squeezed incomes coupled with rising job insecurity could at last spur people to start saving again. If so, the worst of the consumer slowdown may yet lie ahead. Then not just M&S and retailers but the entire corporate sector will suffer."
- FT 6 July 2009: European house prices fell more quickly in the first three months of this year than even in the fourth quarter of 2008 when global recession struck, a trend that looks set to dim the region's hopes for economic recovery."
It's Even Worse In The US
And it gets even worse when you turn to the US. It is widely accepted that as the US lead us into this recession, they will lead us out again. That may be true, but to date, they don't look close to recovering.
The US shed 467,000 jobs in June, 100,000 worse than expected. Unemployment is 9.5%. According to the FT, "Temporary hiring, which tends to recover early, deteriorated sharply after marked improvement in May. Another leading indicator, the average working week, fell to a new record low of 33 hours…The mirage, and with it hopes of a speedy recovery, has vanished."
And then there are house prices. They continue to fall here in the UK, and thousands of people are in negative equity. In my 4 Predictions For 2009, I said UK house prices have another 25% to 35% to fall. I'm yet to see anything, like the willingness of banks to lend or unemployment falling, despite record low interest rates, to change my mind.
And where house prices go, so does the economy. Down.
It's Going To Get Worse
And in the US, the future looks even bleaker for house prices. Over there, home-owners can walk away from negative equity situations, and have been doing so in their thousands. It will ruin their credit status, but when you are sitting on a house you paid $400,000 for and today it is only worth $225,000, and your job is not very secure, you can understand their thinking.
Thousands of foreclosed houses across the country does nothing for house prices. And whilst house prices fall, banks continue to book losses. Whilst banks continue to book losses, they continue to be cautious lenders. Result? Whatever green shoots Ben Bernanke and co might have seen somewhere in the distance are turning to brown twigs of despair.
As Nassim Taleb, the man who predicted the world's economy was heading for disaster, said recently on CNBC's Squawk Box…
"You may have green shoots, whatever you want to call them, you may have temporary relief, but you are still in a world that's breaking…Anything that's fragile like the financial system will eventually crash…We're in the middle of a crash...So if I'm going to forecast something, it is that it's going to get worse, not better."
Smoking Crack About China
The green shoot brigade will no doubt point to a Chinese led recovery. They are smoking crack. We've just been though the greatest outsourcing binge the Western world has ever seen. All our clothes, our kitchenware, our tools, our electrical equipment and our whitegoods are now Made In China.
We simply cannot outsource anything more to China. That boom has finished. At the same time, and this is the killer "double-whammy" blow, the Western world is just not buying Chinese-made goods in nearly the same volume as we were in the go-go days of 2007. We're in recession, stupid.
Don't just take my word for it.
AFP 27 June 27 2009: "Empty container ships -- victims of China's export collapse -- line the river banks in Shanghai's port."
And there are few signs of Chinese recovery. Exports fell 22% in the first half from a year earlier, the Chinese Ministry of Commerce vice-minister Yi Xiaozhun said on the weekend. Mr Xiaozhun also said "The decrease puts huge pressure on China's economic growth, employment and corporate development."
Well, hello China. Despite spending billions of yuan on infrastructure to prop up the economy, the bottom line is China will only truly recover when the Western world recovers. As we've seen above, that isn't going to happen soon.
Debt, Taxes & Interest Rates
I could go on. For example, I haven't even touched on the incredible level of government debt across the globe, especially the US and UK. Taxes must go up in the future to pay for this spending binge. What do you think rising taxes is going to do for economic recovery?
And what about those record low interest rates? If the global economy was seeing green shoots of recovery, what aren't interest rates starting to edge higher? The Bank Of England will this week leave them at their record low of 0.5%.
Then there's the US Federal Reserve. They've just left US interest rates on hold at virtually zero percent, saying rates will stay at "exceptionally low levels" for an "extended period."
Bunker Down For The Long Haul
And what about consumers who've seen their pension funds and share portfolios slashed by 30% over the past 18 months? Do you think they are suddenly going to start spending again, kick-starting the economy? Fat chance. They are hidden in their bunkers, feverishly trying to hold onto their job and to save whatever money they can, whilst they can.
So where are those green shoots? They are a figment of your imagination. Settle in for a few years of tough times. Sorry.
I admit things are not as bad as they were. The economy is in the process of stabilising, but it is not there yet. All the green shooters have is hope, but unfortunately, hope doesn't make house prices rise or unemployment fall. Sorry.
More on this duel...
> If after reading this you want to sell all your shares, at least do it with The Motley Fool's Share Dealing Service. You can buy and sell shares in real time for a flat rate of just £10. Click here to find out how you can open an account for free today. There is no obligation to trade.
> Bruce Jackson does not have an interest in any of the companies mentioned in this article.
